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WIKI ANALYSIS
Lions Gate Entertainment (LGF) is an independent film and television producer and distributor. The studio releases 18 to 20 motion pictures every year and has ~8,000 movie titles in its library, which it distributes on home video/DVD, video-on-demand and pay-per-view, and network and cable television[1]. Its first big success was American Psycho, and the company has since built a reputation for backing films that major studios find too controversial (Fahrenheit 9/11, Requiem for a Dream, Crash, etc.)[2]. Notable TV shows produced by LGF include Weeds on Showtime and Mad Men on the AMC network[3]. The company grossed $1.4B in revenues in fiscal 2008[4][5].
As an independent studio, Lions Gate is one of two pure plays in the entertainment segment. While many of its major studio competitors are part of large conglomerates with varied sources of income, LGF earns substantially all of its revenue from the production and distribution of motion pictures, making the firm’s business particularly vulnerable to the unpredictability of box office performance. The studio also has to contend with declining movie attendance and digital piracy, both of which have plagued the movie industry over the last decade.
Home entertainment sales from films accounted for 45.8% of Lions Gate’s revenues in 2008[6]. The DVD market has matured in the past few years and sales have declined, a trend that adversely impacts studios like LGF. However, there is potential for future growth as next-generation DVD formatting and other digital platforms expand sales opportunities.
Business Financials
Lions Gate grossed $1.4B in revenues in 2008, with 85% coming from motion pictures and 15% from television production[5]. After the initial theatrical release of a film, studios can continue to exploit the movie in ancillary markets, the most lucrative being home video/DVD. Home entertainment sales accounted for 45.8% of Lions Gate’s revenues in 2008[6]. The company earned 21.4% of total revenues outside of the U.S. in fiscal 2008, with around ~21% of that figure coming from Maple Pictures, a Canadian based film and TV distributor and LGF subsidiary[7]. The company pursues an aggressive acquisition-centered growth strategy; its latest purchase came in September 2007 when it bought Mandate Pictures, an independent film producer responsible for Juno and The Grudge franchise[8].
The unpredictable nature of the film and TV industry is apparent in LGF’s volatile earnings stream. While revenue has increased fairly steadily over the past few years, net income varies widely. The negative net income in 2008 stems partly from $485M in higher operating, distribution and marketing, and administrative costs than in 2007[5].
Motion Pictures (85% of revenues)
Lions Gate has historically produced movies with production budgets of $35M or less, compared to the major studio average of $70.8M in 2007[9]. Most of the studio's productions have budgets of $20M or less[9]. LGF often develops films in targeted niche markets where the firm tries to achieve a sustainable competitive advantage; the success of its Saw franchise in the horror genre is a good example[10].
Television (15% of revenues)
In 2008, LGF produced 63 episodes of domestic television programming for a variety of networks, including USA, Showtime, AMC, Spike, and ABC Family[3]. The episodes included one-hour and half-hour dramas, mini-series, animated series and reality and non-fiction programming[3].
In April 2008, Lions Gate announced a joint venture with Paramount Pictures and MGM to create a premium television channel and video-on-demand service [8]. Upon its launch in the fall of 2009, the new venture will provide LGF with an additional platform to distribute its movie and TV library[8].
Trends and Forces
LGF Faces Declining Movie Attendance
As more and more people turn to alternatives like DVDs, television and online video, movie attendance has stagnated. In 2007, U.S. movie attendance was down 2% from 2006[11]. International movie attendance dropped by 8.5% in the same period[12]. As ~14% of Lions Gate’s total revenues in 2008 came from box office sales, declining movie attendance negatively impacts the company’s earnings[6].
Technological Advance Provides Lions Gate With New Opportunities for Growth
The DVD market has reached maturation in the last few years, with sales peaking in 2004 and declining every year since[13]. Media analysts estimate that revenue from DVD sales will fall $500M in 2008 to $23.6B[13]. However, Lions Gate benefits from the rise of next-generation DVD formatting, embodied in Blu-ray’s February 2008 trump over HD-DVD. LGF is part of the Blu-ray consortium and held a 7% market share of Blu-ray revenue during fiscal 2008[14]. The studio’s release of 3:10 to Yuma was the second best selling Blu-ray title in that same period[14]. Other technological advances include digital and video-on-demand platforms that provide the potential for endless shelf space and eliminate manufacturing and distribution costs. These new media forms provide further avenues of growth for film studios.
Digital Piracy Threatens LGF's Earnings
The rising incidence of online piracy poses a growing worry for the movie industry. As more consumers switch to broadband and compression technology continues to shorten movie downloading time, the rate of film piracy looks set to increase[15]. The negative impact on studios is two-fold, as pirated films hurt DVD sales and drive down movie attendance. The Motion Picture Association of America estimates that the industry lost $6.1 billion to piracy in 2005)[16].
Lions Gate Is Exposed to the Unpredictability of Box Office Performance
As an independent studio, Lions Gate is one of two pure plays in the entertainment segment. While many of its major studio competitors are part of large conglomerates with varied sources of income, LGF earns substantially all of its revenue from one source, the release of motion pictures. The success of film releases is very difficult to project, and a movie’s box office performance is often directly related to its performance in ancillary markets such as home video. Lions Gate tries to mitigate these risks by negotiating co-production agreements that provide for cost sharing between it and third-party production companies[10]. The studio also pre-sells certain international distribution rights and offers actors the chance to participate in the financial success of a movie in exchange for reducing up-front payments[10]. Furthermore, Lions Gate has historically produced movies with production budgets of $35M or less, compared to the major studio average of $70.8M in 2007[9]. Most of the studio's productions have budgets of $20M or less[9].
Lions Gate, being a pure play in entertainment, and because of the nature of the business is based more on creative performance greatly more than operational performance, portfolios that incorporate this security often disregard its beta and correlation. There are no comparisons to which to form an accurate beta. For this reason, portfolios that are is not using entertainment strategically will buy this security to add risk, which, if a portfolio finds itself on the lower left side of the frontier line or not on the frontier line of efficiency, which might be more profitable without increasing risk. This point is the intersection of the capital market line and the portfolios efficiency frontier line.
Competition
Lions Gate competes with both major studios (Paramount, Sony Entertainment, Warner Bros, Universal) and smaller studios like Dreamworks Animation SKG (DWA) and the Weinstein Company. Along with DreamWorks, LGF is one of two pure plays in the entertainment segment. While many of the other major studios are part of large conglomerates with varied sources of income, LGF earns substantially all of its revenue from the release of motion pictures.
| Company | Revenue (millions USD) | Operating Income (millions USD) | Net Income (millions USD) | Home Entertainment Sales (millions USD) | Box Office Sales (millions USD) |
|---|---|---|---|---|---|
| Lions Gate | $977[5] | $42[5] | $27[5] | $528[6] | $108[6] |
| DreamWorks Animation SKG (DWA) | $767[17] | $291[17] | $218[17] | ||
| Warner Bros | $11,682[18] | $845[18] | $3,418[18] | $2,094[18] | |
| 20th Century Fox | $6,734[19] | $1,225[19] | |||
| Paramount | $5,476[20] | $104[20] | $2,493[21] | $1,466[21] | |
| Universal | $15,416[22] | ||||
| Sony Entertainment | $8,265[23] | $365[23] | |||
| Walt Disney Pictures | $7,491[24] | $1,201[24] |
Many major studio competitors are part of conglomerates that do not report as many segment metrics
Market Share
The following chart shows 2007 domestic studio market share by gross revenue. Total gross revenue in that year was ~$9.7B for the industry as a whole[25].
| Rank | Company | Market Share |
|---|---|---|
| 1 | Paramount | 15.5% |
| 2 | Warner Bros | 14.7% |
| 3 | Buena Vista | 14.0% |
| 4 | Sony/Columbia | 12.9% |
| 5 | Universal | 11.4% |
| 6 | 20th Century Fox | 10.5% |
| 7 | New Line | 5.0% |
| 8 | Lions Gate | 3.8% |
| 9 | MGM/UA | 3.8% |
| 10 | Fox Searchlight | 1.4% |
| 11 | Miramax | 1.3% |
| 12 | Rogue Pictures | 0.8% |
References
- ↑ LGF 2008 10-K pg. 4
- ↑ Wikipedia: Lions Gate Entertainment. Retrieved on July 6, 2008.
- ↑ 3.0 3.1 3.2 LGF 2008 10-K pg. 10
- ↑ FYE March 31, 2008
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 LGF 2008 10-K pg. 34
- ↑ 6.0 6.1 6.2 6.3 6.4 6.5 LGF 2008 10-K pg. 42
- ↑ LGF 2008 10-K pg. F-40
- ↑ 8.0 8.1 8.2 LGF 2008 10-K pg. 6
- ↑ 9.0 9.1 9.2 9.3 LGF 2008 10-K pg. 7
- ↑ 10.0 10.1 10.2 LGF 2008 10-K pg. 9
- ↑ Motion Picture Association of America: Movie Attendance Study 2007. Retrieved on July 6, 2008.
- ↑ Motion Picture Association of America: International Theatrical Snapshot 2007. Retrieved on July 6, 2008.
- ↑ 13.0 13.1 LA Times: Hollywood studios are editing their home video strategy. Retrieved on July 6, 2008.
- ↑ 14.0 14.1 LGF 2008 10-K pg. 15
- ↑ BBC BBC News: Online Film Piracy Set to Rise. Retrieved on July 6, 2008.
- ↑ Motion Picture Association of America: 2005 U.S. Piracy Fact Sheet. Retrieved on July 6, 2008.
- ↑ 17.0 17.1 17.2 DWA 2007 10-K pg. 35
- ↑ 18.0 18.1 18.2 18.3 TWX 2007 10-K pg. 92
- ↑ 19.0 19.1 NWS 2007 10-K pg. 54
- ↑ 20.0 20.1 VIA 2007 10-K pg. 45
- ↑ 21.0 21.1 VIA 2007 10-K pg. 49
- ↑ GE: 2007 Annual Report. Retrieved on July 6, 2008.
- ↑ 23.0 23.1 SNE 2008 20-F pg. 47
- ↑ 24.0 24.1 DIS 2007 10-K pg. 31
- ↑ 25.0 25.1 Box Office Mojo: Studio Market Share. Retrieved on July 6, 2008.
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